Wednesday, June 12, 2013

What is missing from the stampede of policy innovation is something to
tackle one of the best-known causes of high costs in the book: excessive
market concentration.

Two decades ago, there were on average about four rival hospital systems
of roughly equal size in each metropolitan area, according to research
by Martin S. Gaynor of Carnegie Mellon University and Robert J. Town of
the University of Pennsylvania. By 2006, the number of competitors was
down to three.

The share of metropolitan areas with highly concentrated hospital
markets, by the standards of antitrust enforcers at the Justice
Department and the Federal Trade Commission, rose to 77 percent from 63
percent over the period.

And consolidation is continuing. Professor Gaynor counts more than 1,000
hospital system mergers since the mid-1990s, often involving dozens of
hospitals. In 2002 doctors owned about three in four physician
practices. By 2008 more than half were owned by hospitals.

Research by Leemore S. Dafny of Northwestern University, for instance, found that hospitals raise prices by about 40 percent after the merger of nearby rivals.

Unfortunately, the main remedy to undue provider pricing power is politically out of reach in the United States, though applied in every other wealthy country. That is, government price-setting. Countries providing universal health insurance -- that is, every other
wealthy country in the world -- almost universally empower government to
impose uniform pricing, whether via single payer or filtered through private insurance.

Fee-for-service undoubtedly creates incentives for providers to prescribe unnecessary treatment. But fee-for-service is pretty much the way of the world, and countries where it is in force still pay far less per capita and per procedure than the United States. That's because their governments impose a uniform price schedule and ours doesn't.

UPDATE 6/16: Economist Robert Frank, looking at Sweden's efficient system of state-run universal healthcare, cites evidence that the problem is not consolidation per se but consolidation enabling pricing power:

But when illness strikes, the Swedish health care system responds
efficiently. Managers have exploited economies of scale by consolidating
services into fewer but larger hospitals. The American system has also
gone through consolidation, but, by contrast, boutique hospitals are
also more common here — partly in response to demands from patients with
very high-cost health plans. In large hospitals, CT scanners and other
expensive diagnostic and treatment machines are in nearly constant use,
versus only a few hours of weekly use in some small ones.

Larger hospitals with heavier patient flows also enable their staff to
hone their skills through specialization and experience. If you are
getting a knee replacement or coronary bypass surgery, you want teams that do scores of such procedures each month.